SEI Investments Annual Report 2020

Form 10-K (NASDAQ:SEIC)

Published: February 24th, 2020

PDF generated by stocklight.com UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______to ______

Commission File Number: 0-10200 ______

______SEI INVESTMENTS COMPANY (Exact name of Registrant as Specified in Its Charter)

Pennsylvania 23-1707341 State or Other Jurisdiction of Incorporation or Organization I.R.S. Employer Identification No. 1 Freedom Valley Drive Oaks, PA 19456 (Address of Principal Executive Offices and Zip Code) 610-676-1000 (Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol Name of each exchange on which registered Common Stock, par value $.01 per share SEIC The NASDAQ Stock Market LLC (The NASDAQ Global Select Market®) Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Y es ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐

Non-accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $6.7 billion based on the closing price reported by NASDAQ on June 30, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter). For purposes of making this calculation only, the registrant has defined affiliates as including all executive officers, directors and beneficial owners of more than 10% of the common stock of the registrant.

The number of shares outstanding of the registrant's common stock, as of the close of business onJ anuary 31, 2020:

Common Stock, $.01 par value 149,975,521

DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference herein:

1. The definitive proxy statement relating to the registrant’s 2020 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year covered by this annual report, is incorporated by reference in Part III hereof. SEI INVESTMENTS COMPANY Fiscal Year Ended December 31, 2019

TABLE OF CONTENTS

Page PART I Item 1. Business. 2 Item 1A. Risk Factors. 12 Item 1B. Unresolved Staff Comments. 22 Item 2. Properties. 22 Item 3. Legal Proceedings. 22 Item 4. Mine Safety Disclosures. 24

PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 25 Item 6. Selected Financial Data. 26 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 43 Item 8. Financial Statements and Supplementary Data. 44 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 85 Item 9A. Controls and Procedures. 85 Item 9B. Other Information. 85

PART III Item 10. Directors, Executive Officers and Corporate Governance. 86 Item 11. Executive Compensation. 86 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 87 Item 13. Certain Relationships and Related Transactions, and Director Independence. 89 Item 14. Principal Accounting Fees and Services. 89

PART IV Item 15. Exhibits, Financial Statement Schedules. 90 Item 16. Form 10-K Summary. 90 PART I

Forward Looking Statements This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve certain known and unknown risks, uncertainties and other factors, many of which are beyond our control, and are not limited to those discussed in Item 1A, “Risk Factors.” All statements that do not relate to historical or current facts are forward-looking statements. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” "will," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to present or anticipated strategies, products and markets, future revenues, capital expenditures and uses, expansion plans, future financing and liquidity, personnel, and other statements regarding matters that are not historical facts or statements of current condition.

Any or all forward-looking statements contained within this Annual Report on Form 10-K may turn out to be wrong. They can be affected by inaccurate assumptions we might make, or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, we cannot guarantee any forward-looking statements. Actual future results may vary materially.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You are advised, however, to consult any further disclosures we make on related subjects in our filings with the U.S. Securities and Exchange Commission (SEC).

Item 1. Business. Overview SEI is a leading global provider of technology-driven wealth and investment management solutions. We deliver comprehensive platforms, services and infrastructure – encompassing investment processing, investment operations and investment management – to help wealth managers, financial advisors, investment managers, institutional and private investors create and manage wealth.

As of December 31, 2019, through its subsidiaries and partnerships in which the company has a significant interest, SEI manages, advises or administers $1.0 trillion in hedge, private equity, mutual fund and pooled or separately managed assets, including $352.0 billion in assets under management and $683.3 billion in client assets under administration. Our affiliate, LSV Asset Management (LSV), manages $107.5 billion of assets which are included as assets under management.

General Development of the Business SEI has over 50 years of experience with developing innovative business solutions designed to help clients meet the challenges of managing personal and institutional wealth.

We began doing business in 1968 by providing computer-based training simulations for bank loan officers. We developed an investment accounting system for bank trust departments in 1972 and became a leading provider of investment processing outsourcing services to banks and trust institutions in the United States. Later, we broadened these outsourcing services to include a family of investment management products, as well as investment operations outsourcing services. We became a public company in 1981.

We have evolved these services into innovative, platform-based solutions and financial technologies. We have also expanded into global markets. Today, we serve approximately 11,300 clients in the United States, Canada, the United Kingdom, continental Europe, South Africa and East Asia.

In each of these markets, we have combined our core competencies – investment processing, investment management and investment operations – to deliver broader and more strategic solutions for clients and markets. Today, we offer a global wealth management platform for private banks and wealth services firms; a comprehensive platform for operating an investment advisory business; an Outsourced Chief Investment Officer (OCIO) platform for retirement plan sponsors and institutional investors; a total operational outsourcing platform for investment managers and a life and wealth platform for ultra-high-net-worth families. Mission and Strategy SEI’s mission is to deliver innovative and comprehensive investment processing, investment management and investment operations platforms to help clients achieve lasting success. By strengthening our position as a global provider of these platforms, we seek to achieve earnings growth and increased shareholder value through these strategies:

Create broader solutions for wealth services firms . Wealth managers, financial advisors, investment managers and asset owners face increasing competitive pressures, ever-growing regulations and the need to replace aging legacy technologies. While addressing these industry demands, they also seek to expand services, offer differentiated solutions, improve efficiencies, reduce risk and better manage their businesses. Our comprehensive platforms, including financial technologies, outsourced investment processing and operations services, and investment management products, help wealth services firms better serve their clients and create opportunities to enable their success.

Help institutional investors manage retirement plans and operating capital. Retirement plan sponsors, as well as healthcare systems, higher education and other nonprofit organizations, strive to meet their fiduciary obligations and financial objectives while reducing business risk. Our OCIO platform delivers integrated solutions to help clients address objectives, reduce business risk, provide ongoing due diligence and increase operational efficiencies.

Support affluent individual investors in the management of their life and wealth goals. Investors demand a holistic wealth management experience that focuses on their unique life goals and provides them with an integrated array of financial services beyond traditional wealth management offerings. Our proprietary goal discovery process, comprehensive wealth advisory services and wealth management dashboard empower clients to confidently make more effective, impactful decisions and interact with their wealth.

Continue expanding our global footprint . Global markets present significant growth opportunities. We have evolved platforms and business models for the global wealth management marketplace, focusing on the needs of institutional investors, private banks, independent wealth advisers, investment managers, investment advisors and affluent individual investors.

Focus SEI’s business strategies on addressing converging markets and clients’ needs. Increasingly, the needs of wealth managers, investment managers, financial advisors, family offices and investors are converging, particularly among larger firms and investors. With our One SEI strategy, we are addressing the increasingly complex and progressively converging needs of markets and clients by leveraging existing and new SEI platforms and assets making them accessible to be combined for unique client-responsive solutions. We are modularizing larger wealth management and investment processing platforms into standalone components, enabling an unbundled approach to product delivery.

Business Model We are guided by our business model’s fundamental principles in managing the company: • Innovation. We believe our unique position in the industry – spanning financial technology, investment operations and investment management – facilitates product innovation to enable client success. We have over 50 years of experience with developing new categories of solutions that anticipate and address complex business challenges. We foster an open, collaborative culture and strive to nurture a talented and engaged workforce. We believe our commitment to driving growth through product innovation – targeting 8-10% of annual revenues for research and development – is a competitive advantage. • Organic growth. We seek to grow organically by delivering enterprise-wide platforms to the markets we serve. We are growing the business through new-name sales, cross-sales and new platform delivery. We are also entering adjacent markets by delivering existing and new platforms. To expand capabilities or enable organic growth, we may also make strategic acquisitions or strategic investments in other firms. • Client engagement. We strive to forge intimate and enduring client relationships, be a thought leader in the markets we serve, and craft “win-win” pricing models. We believe SEI’s long-lasting client relationships – some of which span decades – are fundamental to enhancing SEI’s financial strength. • Enhanced financial strength. We focus on achieving long-term, sustainable revenue and earnings growth. We favor businesses and solutions that generate recurring revenues and predictable cash flows. We maintain a strong balance sheet and return capital to shareholders through stock purchases and paid dividends. Business Platforms Investment Processing We are a leading provider of investment processing platforms to wealth managers worldwide. Clients include institutional and private-client wealth managers, including banks, trust companies, independent wealth advisers, investment advisors, financial planners and other financial services firms. We primarily deliver investment processing services through two proprietary platforms: the SEI Wealth PlatformSM (the SEI Wealth Platform or SWP) and TRUST 3000®. Through our wholly-owned subsidiaries, we also provide business-process outsourcing services including custodial and sub-custodial services, and back-office accounting services.

SWP provides a global, unified and scalable platform for operating a wealth management business. This comprehensive platform includes investment processing and infrastructure services, and advanced financial technology to support wealth advisory, asset management and wealth administration functions. SWP also provides global wealth management capabilities including a 24/7 operating model, global securities processing, and multi-currency accounting and reporting. Built around a client-centric relationship model, SWP has an open architecture and supports workflow management and straight-through processing.

SWP is offered in Software as a Service (SaaS) or as Platform as a Service (PaaS) delivery modes. We began delivering SWP (PaaS) to private banks and independent wealth advisers in the United Kingdom in 2007, to banks in the United States in 2012, and to investment advisor clients in the United States in 2015. As of 2019, all investment advisor clients are operating on SWP.

The TRUST 3000 platform is a comprehensive trust and investment accounting system that provides securities processing and investment accounting for all types of domestic and global securities and support for multiple account types, including personal trust, corporate trust, institutional trust and non-trust investment accounts. This platform is delivered in SaaS or PaaS delivery modes.

Investment processing platforms include application and business-process-outsourcing services, professional services and transaction-based services. Revenues for these services are recognized in Information processing and software servicing fees on the accompanying Consolidated Statements of Operations.

Application and business-process-outsourcing revenues are earned from monthly fees for contracted SaaS and PaaS services. Revenues are based upon the type and number of investor accounts serviced or as a percentage of the market value of the clients’ assets processed. Professional services revenues are earned from contracted, project-oriented services, including client implementations. Transaction-based revenues are earned primarily from commissions earned on securities trades executed on behalf of clients through one of our investment processing platforms.

Investment Management Our investment management platform consists of investment products including mutual funds, collective investment products, alternative investment portfolios and separately managed accounts. Investment products are used to construct an investment strategy tailored to meet the needs of different investors, taking into consideration their objectives and risk tolerances. Investors typically invest in a globally diversified portfolio that consists of multiple asset classes and investment styles.

Through our wholly owned subsidiaries, we serve as sponsor, administrator, transfer agent, investment advisor, distributor and shareholder servicer for many of these products. We distribute these investment products through investment advisory firms and other wealth managers. We also distribute investment products directly to institutional and individual investors.

Our investment management platform includes other consultative, operational and technology components tailored to the needs of a specific market. These components may include investment strategies, consulting services, administrative and processing services and technology tools. As an example, SEI’s investment management platform is an integral component of OCIO services offered to institutional investors, and SEI’s Turnkey Asset Management Program (TAMP) offered to investment advisors.

As of December 31, 2019, we managed $244.6 billion in assets including: • $177.7 billion invested in fixed-income and equity funds and separately managed account programs; • $58.2 billion invested in collective trust fund programs; and • $8.7 billion invested in liquidity or money market funds. An additional $107.5 billion in assets is managed by our unconsolidated affiliate LSV, a registered investment advisor that specializes in value equity management for its clients.

Investment management revenues are earned primarily as a percentage of net assets under management. These revenues are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations. Our interest in the earnings of LSV is recognized in Equity in earnings of unconsolidated affiliates on the accompanying Consolidated Statements of Operations.

Investment Operations We are a leading global provider of investment operations outsourcing platforms to fund companies, banking institutions, family offices and both traditional and alternative investment managers worldwide. These platforms include business-processing-outsourcing services including fund and investment accounting, administration, reconciliation, global regulatory and compliance services (GRCS), investor servicing and client reporting. We also offer investment operations services to the family office market in the United States.

As of December 31, 2019, we administered $683.3 billion in client assets for traditional and alternative investment fund products, including mutual funds, hedge funds and private equity funds. Revenues from these products are earned primarily as a percentage of net assets under administration, and are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations.

Revenues for the processing of institutional separate accounts and separately managed accounts are generally earned on the number of investor accounts serviced. Assets associated with this separate account processing are not included in reported assets under administration. These revenues are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations.

Business Segments Business segments are generally organized around our target markets. Financial information about each business segment is contained in Note 12 to the Consolidated Financial Statements. Our business segments are: Private Banks – provides outsourced investment processing and investment management platforms to banks and trust institutions, independent wealth advisers and financial advisors worldwide; Investment Advisors – provides investment management and investment processing platforms to affluent investors through a network of independent registered investment advisors, financial planners and other investment professionals in the United States; Institutional Investors – provides investment management and administrative outsourcing platforms to retirement plan sponsors, healthcare systems, higher education and other not-for-profit organizations worldwide; Investment Managers – provides investment operations outsourcing platforms to fund companies, banking institutions, traditional and non-traditional investment managers worldwide and family offices in the United States; and Investments in New Businesses – focuses on providing investment management solutions to ultra-high-net-worth families residing in the United States; developing internet-based investment services; developing network and data protection services; modularizing larger technology platforms into stand-alone components; entering new markets; and conducting other research and development activities. The percentage of consolidated revenues generated by our business segments for the last three years was:

2019 2018 2017 Private Banks 28% 30% 31% Investment Advisors 24% 25% 24% Institutional Investors 20% 20% 21% Investment Managers 27% 24% 23% Investments in New Businesses 1% 1% 1% 100% 100% 100% Private Banks We are a leading provider of global investment processing outsourcing platforms for financial intermediaries such as banks and trust institutions, independent wealth advisers and financial advisors worldwide.

We offer investment processing in both SaaS or PaaS delivery modes. SaaS clients outsource investment processing software services and information processing to SEI, but retain responsibility for back-office investment operations. PaaS clients outsource all the same functions and services as PaaS as well as outsource investment operations, including custody and safekeeping of certain assets, income collection, securities settlement and other back- office accounting activities.

In keeping with our One SEI strategy, we are bringing all of SEI’s assets and platforms to wealth managers in flexible and customizable ways, enabling them to access the collective power of SEI’s comprehensive platforms to solve their unique challenges and complex business opportunities. Clients operate their wealth management and trust businesses on our legacy solution, TRUST 3000, or on our comprehensive, modern solution, SWP. These platforms are offered as either single-platform solutions or in conjunction with standalone components of other SEI platforms and services to create unique solutions depending upon the needs of the client.

SWP offers advanced transformational capabilities across the entire range of wealth management processes, including those of large global wealth managers. SWP enables banks and wealth managers of all types to manage the growing complexity of their operations, replace legacy platforms, comply with complex regulations and make more effective use of capital by outsourcing wealth management processing or operational services.

Our TRUST 3000 and SWP clients sign long-term contracts. For TRUST 3000, clients have initial terms that are generally five to seven years in length. On our TRUST 3000 platform, at December 31, 2019, we had significant relationships with 61 bank and trust institutions in the United States. Our principal competitors for this business are: • Fidelity National Information Services, Inc. (FIS); • Innovest Portfolio Solutions, LLC; • Charles Schwab & Co., Inc.; and • Fidelity Investments. Many large financial institutions develop, operate and maintain proprietary investment and trust accounting systems. We consider these “in-house” systems to be a form of competition.

On our SWP solution, at December 31, 2019, we had significant relationships with 53 signed banks, independent wealth advisers and other wealth managers located in the United Kingdom and the United States. Our principal competitors for this business, in addition to those named above, where there has been sector consolidation through acquisitions, are: • Pershing LLC; • FNZ UK Ltd.; • Temenos Group AG; • Avaloq; • SS&C Technologies; • Fiserv, Inc.; and • other smaller technology firms. We also consider “in-house” systems to be a form of competition.

This segment also offers investment management and distribution programs for banks, wealth managers and other financial services intermediaries globally. We also deliver customizable wealth management programs leveraging more than three decades of experience with manager research and advice, asset allocation advice and portfolio construction advice. These programs are flexible and provide a better solution at a lower cost of ownership and quicker speed to market through outsourcing. We can deliver active, factor-based and passively-managed solutions constructed on the principals of behavioral finance to give firms the ability to focus on their clients while implementing and maintaining consistent and efficient processes that help them grow their business and manage risk.

We have business relationships with 285 banks, wealth managers and other financial services intermediaries at December 31, 2019. Our definition of an asset management distribution client for this segment includes financial intermediaries who have exceeded a minimal level of customer assets invested in our investment products. With the growth of our business, the minimal level of customer assets which defines a "business relationship" is adjusted from time to time. Our business is primarily based on 98 asset management distribution clients who, at December 31, 2019, had at least $5.0 million each in customer assets invested in our programs. With primary focus on the markets of the United States, Canada, United Kingdom, continental Europe, Hong Kong and Singapore, we serve clients, and their clients, throughout the globe in six languages. The principal competitors for this business are: • Russell Investment Group; • BlackRock; • discretionary portfolio managers; and • various multi-manager investment programs offered by other firms. We also consider “in-house” proprietary asset management capabilities to be a form of long-term competition.

Investment Advisors

We are a leading provider of investment management solutions throughout the United States to registered investment advisors, financial planners and life insurance agents, many of whom are registered with independent broker-dealers. These solutions include SEI’s investment management platform and investment processing platform and are generally offered on a bundled basis. We also help advisors manage and grow their businesses by providing them access to marketing support programs and practice management services which include, for example, workflow recommendations, succession planning advice, business assessment assistance and recommended management practices. We believe our integrated solution helps investment advisors reduce risk, improve quality and gain operational efficiency which allows them to devote more of their resources to acquiring new clients and achieving better outcomes for their existing clients.

Advisors are responsible for the investor relationship which includes creating financial plans, implementing investment strategies and educating and servicing their customers. Advisors may customize portfolios to include the SEI-sponsored mutual funds, separate account managers provided through our programs and third party mutual funds curated by our Investment Management Unit. Our wealth and investment programs are designed to be attractive to affluent or high-net-worth individual investors and small to medium-sized institutional retirement plans.

We continually evaluate and enhance our offering to meet the emerging needs of our advisors and their end clients. The enhanced service offerings enabled through SWP provide a more diverse range of back-office, front-office and client-facing investment processing and investment management capabilities. We completed the movement of all our clients onto SWP in 2019. With the movement complete, we will focus on further enhancements to SWP and recruiting new advisors.

We estimate we have business relationships with approximately 7,600 financial advisors at December 31, 2019. Our definition of a client for this segment includes financial advisors who have exceeded a minimal level of customer assets invested in our investment products. With the growth of our business, the minimal level of customer assets which defines a "business relationship" is adjusted from time to time. Our business is primarily based on approximately 2,300 investment advisors who, at December 31, 2019, had at least $5.0 million each in customer assets invested in our programs. Revenues are earned largely as a percentage of average assets under management.

The principal competition for our investment management products is from other active money managers, passive investment management sponsors, other turnkey asset management providers, mutual fund companies, custody service providers and the proprietary investment management programs of broker dealers. In the advisor distributor channel, the principal competitors include: • AssetMark Investment Services Inc.; • Brinker Capital; • EnvestNet, Inc.; • Fidelity Investments; • TD Ameritrade; • Charles Schwab & Co., Inc.; and • other broker-dealers. As we introduce SWP, we expect to more directly compete with custody service providers.

Institutional Investors

We are a leading provider of Outsourced Chief Investment Officer (OCIO) platforms for retirement plan sponsors, healthcare systems, higher education and other not-for-profit organizations globally. We have a broadly experienced team

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